COVID-19 seen curbing remittance flows

The China-epicentered coronavirus (COVID-19) contagion may curb remittance flows to the Philippines this year as travel restrictions hinder the movement of migrant labor in the region, an economist from Philippine National Bank (PNB) said.

In a research note dated Feb. 18, Jun Trinidad said remittances to the country might rise by 2 to 3 percent this year but with downside risk arising from the COVID-19 breakout.

The Bangko Sentral ng Pilipinas (BSP) earlier reported that overseas remittances to the country hit a new high of $33 billion in 2019, of which cash-based remittances accounted for $30.1 billion, rising by 4.1 percent from the previous year. This indicated resilience amid a challenging period marked by the US-China trade war that, in turn, tempered the growth of the global economy.

This first semester of 2020, however, Trinidad said the travel ban and other restrictions triggered by COVID-19 were obstructing overseas job placements, particularly in the Asian labor markets.

At the same time, the economist said the outbreak had raised the possibility of overseas Filipinos in countries with worsening COVID-19 infection returning, thereby curbing remittance flows.

Based on latest reports, COVID-19 infections globally are now nearing 80,000 while the death toll has exceeded 2,600.

“Against upbeat investment demand and construction prospects that are likely to prime imports alongside export prospects undermined by COVID-19, a return to a current account [deficit] in the range of 2 percent of GDP (gross domestic product) would most likely occur in 2020,” Trinidad said.

On the back of such fundamental external account risk, PNB sees the peso sliding back to the 52 to 53 range against the US dollar in the third quarter of this year. The local currency is trading close to 51 against the greenback.

In 2019, Trinidad said total remittances contributed to a narrowing current-account gap as implied by the hefty increase in the BSP’s gross international reserves.

The government is already anticipating a slight but “minimal” slowdown in cash remittances from overseas Filipino workers (OFW) due to the new coronavirus threat.

Cabinet Secretary Karlo Nograles said on Monday the government had adjusted its 2020 growth target in OFW remittances to $34.2 billion amid the COVID-19 outbreak.

“We also expect the outbreak to have a minimal impact on OFW remittances,” Nograles said in a press briefing on Monday.

He went on: “We expect that the COVID-19 outbreak could dampen our total cash remittance growth in 2020 by 0.8 percentage points, from 3 percent to 2.2 percent.”

Nograles said the government initially set a target of $34.5 billion in OFW remittances this year with a projected growth rate of 3 percent, but lowered this to 2.2. percent with an expected $ 34.2 billion in remittances for this year.

He pointed out that the lower projection would still exceed last year’s record-high OFW remittances of $ 33.5 billion.

Nograles also expressed optimism that OFW remittances from other countries might help compensate for the possible slowdown in OFW remittances from China, Macau and Hong Kong.

In a separate research note dated Feb. 13, Trinidad said the likelihood of reform implementation by the government with favorable and lasting effects had improved over the next year or so.

In PNB’s view, global credit watchdog Fitch Ratings stood ready to raise the country’s investment grade to the next level– closing in on the much-coveted A rating–if Congress could pass key fiscal and macroeconomic reform measures.

PNB said it believed that the new reform measures critical to notching the upgrade were the bills on corporate income tax and incentives rationalization act (Citira) and the passive income and financial intermediation taxation act (Pifita).

“Key macro effect of Citira in our view is to create that supply response form the beneficiary firms as the CIT (corporate income tax) is cut,” Trinidad said.

He said money freed up by the tax cut could instead be deployed to upgrade production efficiency by acquiring new capacity or systems, or to boost labor productivity by investing in staff training and acquisition of new skill sets. Tax cuts are also seen to support better dividend policy of companies.

“For the SME (small and medium enterprise), it is hoped that the lower CIT over time would improve the likelihood of tax compliance and thus improve collection efficiency of corporate income taxes,” Trinidad said.

“We believe benefits of the CIT cuts would offset the employment costs in the rationalization of fiscal incentives. With less than 40 percent of households accessing bank services, we expect the Pifita bill to strengthen the savings culture and broaden household preference to invest in financial assets and not just in real assets, e.g. fancy cars,” Trinidad said. With a report from Julie M. Aurelio